Legal Uncertainty as a Welfare Enhancing Screen

Posted: 19 Aug 2014 Last revised: 30 Oct 2018

See all articles by Matthias Lang

Matthias Lang

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: January 1, 2017

Abstract

Consider legal uncertainty as uncertainty about the legality of a specific action. In particular, suppose that the threshold of legality is uncertain. I show that this legal uncertainty raises welfare. Legal uncertainty changes deterrence in opposite directions. The probability of conviction increases for firms below the threshold, while the probability of conviction decreases for firms above the threshold. Hence, legal uncertainty acts as a welfare enhancing screen and increases welfare. Legal uncertainty discourages some actions with low private benefits, while it encourages other actions with high private benefits.

Keywords: Enforcement, Deterrence, Legal Uncertainty, Regulation, Asymmetric Information, Incomplete Contracts

JEL Classification: D8, K2, K4, L5

Suggested Citation

Lang, Matthias, Legal Uncertainty as a Welfare Enhancing Screen (January 1, 2017). European Economic Review, Vol. 91, 2017, doi: 10.1016/j.euroecorev.2016.10.007. Available at SSRN: https://ssrn.com/abstract=1969945 or http://dx.doi.org/10.2139/ssrn.1969945

Matthias Lang (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
Bonn
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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